Germany’s most popular political party is set to choose a new leader Friday, and whether or not Chancellor Angela Merkel’s hand-picked successor comes out on top could tell markets what to expect from Berlin and Europe’s largest economy in the years ahead.

The 1001 delegates to the Christian Democratic Party (CDU) congress in Hamburg can select from more than a dozen candidates vying for the party chair, but two prospective replacements for Merkel have already come to the fore: chancellor confidant and erstwhile Saarland Minister President Annegret Kramp-Karrenbauer, known locally as AKK; and Friedrich Merz, who after losing his fight for party dominance to Merkel in the 2000s exited politics to work for various corporations, including investment behemoth BlackRock.

German Health Minister Jens Spahn is also a candidate for the top party slot, but is currently the third choice, according to most analysts.

Merz has returned to politics with a vengeance, and has received strong support from Wolfgang Schaeuble, the president of the Bundestag, Germany’s lower house,. Like Merz, Schaeuble was sidelined by Merkel during her assent, and the chancellor’s former interior and finance minister said Tuesday that elevating Merz to party chairman “would be the best thing for the country.”

Observers say AKK, already the CDU general secretary, will likely continue to back Merkel’s centrist policies while Merz’s background and political past indicates a pro-business bent and a penchant for cutting taxes.

Merz said ahead of Friday’s party election that he will push to eliminate taxes on earnings from stock sales used for retirement savings, and that he wants to bin the current tax for supporting development in eastern Germany.

Merz’s 11th-hour support from a CDU luminary such as Schaeuble shows the fissures within the party, which has seen its popularity decline rapidly in recent years. The CDU, which has become more centre than right-wing under Merkel, lost over 20pct of its lower house seats following last year’s federal elections and posted a historic low this year in Hesse state balloting, the latter proving to be a disastrous result which immediately preceded Merkel’s announcement that she would resign as party leader.

Muddle in The Middle

Playing to a larger crowd has proven successful for Merkel, who remains popular among voters. But co-opting policies of both adversaries and allies like the Social Democrats (SPD), the junior partner in Merkel’s grand coalition, may have been counterproductive for her party, and Germany as a whole. According to a 2017 article in Foreign Policy: “At a time when much of the West seems to be bolting toward extremes, she’s turned German politics into one big, warm-and-fuzzy centrist feather bed. In doing so, she may be doing lasting damage to the Federal Republic.”

A number of analysts expect a Merz victory to signal a swing to the right, which may enliven German politics. Merz could also recoup support from CDU voters, many of which it seems have grown tired of what looks like a muddle in the middle and since switched allegiances to either the pro-business Free Democrats or the far-right Alternative for Germany (AfD).

In a note, Deutsche Bank said: “Hopes from business are primarily pinned on Friedrich Merz, who would probably press for a reform-oriented policy, but hardly change Germany’s EU stance.

“Merz could trigger a self-reinforcing dynamic, as many conservatives seem to hope, that he could lead the CDU out of the current mess.”

Meh For Markets?

Ralph Solveen, deputy chief economist at Commerzbank, said it is hard to tell what kind of impact Friday’s vote will have on the markets. “I don’t know if there will be a big reaction.”

Merz is a bit more business-friendly than AKK, Solveen said, but even if he wins, “We shouldn’t expect a major change in policy.”

Change, however, will come eventually, Solveen noted. A Merz victory “would be a decision by the party to take a path that differs from the Merkel era.”

Some market players have suggested a Merz win could hurt the euro as he could be opposed to reforms designed to solidify the European Union, while an AKK victory would support the status quo and thus demand for the single currency.

ING Chief German Economist Carsten Brzeski played down such speculation, saying he expects “very little change” in the currency markets following the vote.

In its report, Deutsche Bank said a Merz victory could shake up Berlin, adding another variable to trading outlooks. “If he is elected, the [grand coalition’s] end seems to be a question of a few months only. The SPD’s strict focus on the enhancement of the “Sozialstaat” (social state), including the request for a EUR12 minimum wage, indicates that the SPD is preparing itself for the possibility of snap elections.”

A call for new elections could renew the inner CDU battle. The CDU chair is also generally the top candidate in federal elections, but a close vote Friday and a dissolution of the governing coalition may force Germany’s leading mainstream party to begin the leadership selection process all over again.

Eric Culp, LiveSquawk News - Frankfurt

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